Money as Debt: Critiques and Suggestions

[Alerik the Fortunate]

The following vidoe, Money as Debt implies that the fractional reserve banking system and privatized issuing of credit which forms the bulk of the monetary system is inherently unstable and inevitably creates inescapable debt slavery for the majority of people and effective disenfranchisement of democratic processes in favor of corporate behind-the-scenes influence. I tend to agree, and find the solution of governments creating fiat currency matched to the value of new public infrastructure to be interesting. However, I have a very weak economics background and am curious as to the critiques of the presented description and alternative proposals for revising the money system that might be proposed by more knowledgeable members of the board.

[NecronLord]

The alternative it proposes allows a government to spend unlimited money on what it thinks proper.

Imagine the UK Government adopted this system... In theory it could immediately spend a hundred trillion dollars on returning its armed forces to absolute world preeminence. This would of course, be absurdly decoupled from real value and create instant inflation, but with the existing system, international banks and credit ratings agencies keep government spending within broad limits, compared to this.

Entrusting a small group of elected officials with the banker's magic hat to create as much money as it wants... seems bad.

Especially when you consider that the current banking system manages to interface between democracies and dictatorships. A system that just gives government total power would be... interesting in dictatorships. Of course, this isn't so say that it isn't evil and exploitative, but it does discourage wheelbarrows-of-money-to-buy-a-loaf level hyperinflation, and allow international trade.

[DatBurnTho11]

Might coupling the governments ability to spend unlimited money to infrastructural development programs only (through some kind of regulations) address this issue? I think that was the ideal the producer presented.

[NecronLord]

As a government worker, I enjoy being paid. This monetary system would prevent that.

Make no mistake, he's not eliminating the magic hat, with this proposal he's just concentrating all the magic hats in the hands of the party central committee state.

[Plushie]

While the Money as Debt people (amateurishly) highlight some of the difficulties with the current central bank managed fiat monetary system, they propose what is probably the only worse monetary arrangement one could imagine.

Control of the money supply is walled off from the legislature in modern economies for very good reasons: Governments have historically been incredibly irresponsible when in possession of such. From the extreme examples of inter-war Germany and modern Zimbabwe to more mild, but no less important, examples such as the United States in the 1970's or 00's. More direct control by governments over the money supply has existed in the past when coins were a much larger portion of the money supply, and governments were almost exclusive issuers of coinage. Historical evidence, then, shows state mis-management of money on an extremely wide scale, from the Roman Empire all the way through to 18th century Britain.

Independent central banks are a necessity if you're going to have centralized planning of the money supply.

The problem with simply tying increases in the money supply to some form of spending (like infrastructure) is not all infrastructure projects increase the demand to hold cash balances in line with the supply of cash balances created by that spending. Long run monetary equilibrium needs to be maintained so that our economies don't suffer the depredation of either malign deflation (which creates recessions and depressions) or inflation (which creates unsustainable economic bubbles).

The best monetary institutional arrangement is one that maintains a money supply which can vary in sync with the demand to hold money as costlessly as possible. A central bank that could be tied to a stable NGDP growth rule, as suggested by Scott Sumner, would be a decent possibility, but probably the ideal solution is the one suggestion by the modern free banking school: A system of competing note issuers which create both deposit and bank note money substitutes which are convertible into some base money whose supply is either fixed or predictably growing. The incentives of such a system would allow the monetary base itself to represent a stable store of value, while an increase or decrease in the monetary substitutes would suffice to meet sudden increases or decreases in liquidity demand.

[Simon_Jester]

The best monetary institutional arrangement is one that maintains a money supply which can vary in sync with the demand to hold money as costlessly as possible. A central bank that could be tied to a stable NGDP growth rule, as suggested by Scott Sumner, would be a decent possibility, but probably the ideal solution is the one suggestion by the modern free banking school: A system of competing note issuers which create both deposit and bank note money substitutes which are convertible into some base money whose supply is either fixed or predictably growing. The incentives of such a system would allow the monetary base itself to represent a stable store of value, while an increase or decrease in the monetary substitutes would suffice to meet sudden increases or decreases in liquidity demand.

Er... how is this system different from the 19th century American practice of allowing banks to print, literally, "banknotes:" their own paper money?

That system certainly didn't contribute to financial stability, or to the long term viability of banks.

[Plushie]

Well, for instance, an actual system of open markets in banking wouldn't include prohibitions on intra- and inter-state branches for various banks, and wouldn't contain the requirement that banks hold as part of the reserves backing their notes serially unstable public bonds, whether state or Federally issued. In fact, most of the instability of the 'free banks' of the late antebellum period can be attributed to these two regulations: The unit banking laws prevented banks from establishing wider branch networks and thus creating well capitalized branch networks that are able to survive adverse shocks to the financial system, and the bond collateral requirement introduced a serious source of instability in bank capital as state bonds were often subject to default by frequently profligate state governments (Fr.ex, waves of state defaults in the 1840's and at the outset of the Civil War were accompanied by waves of bank failures as the required capital of various banking institutions suddenly became worthless).

Outside these shortcomings, the 'free' banks of the antebellum period were actually remarkably successful. Tales of 'wildcat banking' are mostly mythical or related to political propaganda efforts by Whigs interested in reestablishing a national bank for personal benefit.

See:
'Wildcat Banking, Banking Panics, and Free Banking in the United States', Gerald P Dweyer
'Free Banking and Bank Entry in Nineteenth-century New York', Howard Bodenhorn
and the chapter on the United States in 'The Experience of Free Banking', written & edited by Kevin Dowd